Exam 2 Chapter 11

Analytical procedures

Calculating the gross profit rate by store and comparing the ratio of sales in the last month to total sales for the year are examples of:

AN INCREASE IN SALES DUE TO ECONOMIC CONDITIONS → a decline in sales is an inherent risk Improper revenue recognition Inability to collect receivables Restrictions placed on sales by laws

Inherent risks related to receivables and revenue include all of the following EXCEPT:

Significant

Risks identified by auditors that require special audit consideration are referred to as __________ risks.

Channel stuffing

Substantial sales returns following the balance sheet date may be indicative of boosting sales by inducing customers to buy in excess, which is known as __________ __________.

Inherent risk and control risk

The auditor's assessment of the risks of material misstatements include assessments of _________ risk and _________ risk, which are used to design further audit procedures.

Cashier

The employee responsible for controlling and depositing checks should be the:

Bill of lading

The shipping document created at the time of loading the goods into cars or trucks is called a(n) _____ of _____.

A commitment to competence

Which control environment component helps management to address complex accounting principles, estimates, and computations that increase the risk of errors in revenue recognition?

Sales

Which department is typically responsible for taking and controlling customers' orders?

Sales department

Which department is typically responsible for taking and controlling customers' orders?

Inquire as to who performed various functions Review revenue budgets and variance Perform a walk-through of the cycle

As the auditors confirm their understanding of the revenue cycle, they are likely to:

Comparative analyses of revenue Analysis of other accounts receivable

Audit documentation (working papers) for receivables and revenues include:

Comparative analyses of revenue Analysis of other accounts receivable

Audit documentation (working papers) for receivables and revenues include:

Timing lags in recording cash receipts Timing lags in recording sales transactions

Differences reported by customers in confirmation replies typically arise because of:

Competition Customer demand

EXTERNAL factors that can influence the revenue cycle include:

TAKING OVER THE MAILING OF MONTHLY STATEMENTS TO CUSTOMERS → this is an internal audit activity Soliciting feedback from customers about billing accuracy Reviewing sales performance reports Reviewing the aging of accounts receivable report

Management monitoring activities over the revenue cycle include all of the following except:

Fidelity bonds

Management should make appropriate background checks of prospective employees and obtain ________ bonds on employees in positions of trust.

Beginning accrued interest receivable → prior year audit workpaper Interest earned → computed based on the terms of the note Interest collected → traced to cash receipts records Ending accrued interest receivable → computed by the auditors

Match each item on the interest reconciliation with its source:

Review collectivility status of each delinquent account with credit manager Review confirmation exceptions for indications of amounts in dispute Investigate the credit ratings for delinquent and unusually large accounts

To develop their own estimate of the allowance for uncollectible accounts auditors may:

SEC filings or proxy statements Transactions with customers or suppliers that have unusual terms ACCOUNTING RECORDS FOR TRANSACTIONS WITH USUAL CUSTOMERS Conflict of interest statements completed by management

To identify related party transactions, auditors should review all of the following EXCEPT:

Net realizable value

Trade and accounts receivable should appear as separate items in the current asset section at their:

Confirmations are not required if they would be ineffective

Under US auditing standards auditors:

Inherent

Auditors use the understanding of the client and its environment to consider ____________ risks, including fraud risks, related to receivables and revenue.

Account for all documents by serial number

In obtaining assurance that all shipments have been billed, auditors should:

Existence, occurrence, and rights Valuation and accuracy

Confirming receivables with debtors obtains evidence regarding:

An effort to negotiate other terms should be made

When a customer's credit is not approved, the customer should be notified and:

Banks

Notes receivable are typically used for transactions of substantial amounts with customers and typically represent the single most important asset for:

Notes receivable may need to be discounted to present value Cash receipts from franchise fees may be inappropriately recognized before services are rendered.

Problems auditors may encounter in auditing revenue recognition include:

When performance obligations are satisfied

Under the new FASB revenue recognition standard, revenue is recognized:

COPY OF THE CASH RECEIPT Customer's purchase order Client's sales order Copy of the sale invoice

When testing a sample of sales transactions for controls, auditors compare descriptions and quantities of items from shipping documents to all of these documents except:

Customer's purchase orders Duplicate copies of sales invoices Client's sales orders

The audit procedures for the verifications of sales transactions selected for immediate testing may begin with a comparison of the:

An officer, stockholder, or director

Auditors should be most concerned with investigating charge-offs of a note or account receivable from:

Management's reasons must be evaluated Alternative procedures must be performed to obtain relevant and reliable evidence

If management refuses to allow the auditors to perform external confirmation procedures:

Determine confirmation requests are directed towards an appropriate confirming party Mail confirmation requests in envelopes bearing the CPA firm's return address

To control risks in the confirmation process, auditors should:

Internal audit

This department contributes to the monitoring of internal control over the revenue cycle by periodically taking over the monthly statement process, sending confirmations to customers, and reviewing revenue cycle documentation:

Divide duties between different departments

To strengthen controls over credit sales and reduce the opportunity for fraud, companies should _______ for all revenue cycle activities.

False

True or false: Any adjustments to sales for allowances and returns must be supported by serially numbered credit memoranda that is signed by an employee that is responsible for the maintenance of customers' ledgers.

True

True or false: Management's commitment to integrity and ethical values is an important component in the control of revenue and receivables

False

True or false: The purpose of window dressing is to fraudulently misstate financial statements:

Valuation and accuracy

Auditors need to obtain an aged listing of receivables to reconcile to the ledgers and address which audit objective?

Aged trial balance

A listing of individual customers' accounts classified by the number of days each account has been outstanding is a(n) __________ __________ __________ of trade accounts receivables.

Low

Accounts receivable can be confirmed at an interim date rather than at year-end if risk of material misstatement for existence is:

Confirmation

Audit evidence obtained as a direct written response to the auditors from a third party in paper form or by electronic or other medium is an external _________.

Documentation of internal controls Analysis of allowance for uncollectible accounts and notes Aged trial balance of trade accounts receivable

Audit documentation (working papers) for receivables and revenues include:

Side agreements

One problem that auditors may encounter while testing methods for receivables and revenue is that management or employees may have established certain __________________ agreements that could effect the final terms of sale.

Revenue recognized under complex agreements GROSS PROFIT PERCENTAGE Sales returns Allowance for uncollectible accounts

Accounting estimate(s) related to receivables and revenue include all of the following EXCEPT:

Pledging If A/R is pledged, then you hand your A/R over to someone else as collateral, giving them future money

Auditors can gather evidence of the _______ of receivables, which assigns the claim against the receivable as security for a debt, through external confirmations.

Valuation and accuracy

Selecting a sample of sales invoices and examining them for evidence of a second-person review addresses which assertion?

Further evidence to determine the accuracy of the account may or may not be required

When a customer's response to a receivable confirmation contains restrictive language concerning its use:

Follow up with a second request for information

When positive confirmations are used and there are non-respondents, the auditors should:

Aging of receivables Confirmations of any large accounts that are new or delinquent Investigation of cutoff of sales and cash receipts

Audit work that needs to be performed at year-end as opposed to an interim date include:

Competence of the personnel involved

Auditors may choose to evaluate management's process of developing the allowance for uncollectible accounts balance by considering the reasonableness of the process and the:

The ratio from last year Budgeted ratios Average ratios for the industry

For a reasonableness test, the accounts receivable turnover ratio for the current year should be compared to:

Both cash and general accounting records

For effective control, the custodian of notes receivable should not have access to:

New types of sales transactions New products and services

INTERNAL factors that can influence the revenue cycle include:

Confirm the note with the holder

If an auditor is unable to inspect a note because it is being held by others at the time of examination, an acceptable alternative is to:

Intentional overshipment of goods → recording unearned revenues Holding the sales journal open to record next year's sales as having occurred in the current year → cutoff problems Recording sales when the customer is likely to return the goods → recording revenue when significant uncertainties exist

Match the fraud example with misstatement description:

Positive : request addressed to the debtor asking for a reply Negative : request asking for a reply only if the balance shown is incorrect

Match the type of confirmation request with its description:

False

True or false: A department under the control of sales executives should perform billing.

Bill and hold

Sales that are invoiced but not shipped are called ________ and _________ transactions.